Land Use
 

A share in condo sales looms as point of contention in deal to redevelop World Trade Center

Gatehouse Capital is planning to convert the former office tower into a W hotel with apartments above. Gatehouse’s original plan included a giant ferris wheel as a riverfront attraction, but it has faced public opposition and seems unlikely to be included.

Gatehouse Capital

Gatehouse Capital is planning to convert the former office tower into a W hotel with apartments above. Gatehouse’s original plan included a giant ferris wheel as a riverfront attraction, but it has faced public opposition and seems unlikely to be included.*

What’s the World Trade Center building worth?

Key city officials are grappling with that question as they begin negotiations with Gatehouse Capital, the Dallas-based company selected to put the vacant building back into commerce. Overlooking the river at the foot of Canal and Poydras streets, the 33-story, X-shaped building may be the most valuable development site in New Orleans.

So far, most of the attention to Gatehouse’s proposed deal with the city has focused on its proposal to make a single, up-front payment of $10 million, or, as an alternative, to pay 105 percent of the building’s still-to-be-determined appraised value. In exchange, Gatehouse would secure a 99-year lease on the building and the right to build 280 luxury apartments above a 245-room W hotel.

What has gotten little attention is that Gatehouse would have the right to sell the 280 apartments as condos five years after completing their construction. That could yield Gatehouse a windfall, real estate industry officials say. As part of the negotiations, city officials could demand that the public get a cut of those profits.

City officials also could insist on getting annual rent payments from Gatehouse, which Garrett Thelander, a real estate banker in New York City, said is a common practice there.

The World Trade Center deal turns on another detail that hasn’t gotten much attention: state and federal taxpayers would be on the hook for $75 million of the $190 million that Gatehouse is proposing to spend on the project. The $75 million would be in the form of state and federal tax credits available to any private developer of the building because of its historic significance.

“The whole deal depends on the historic tax credits,” said Steve Peer, the managing member of James H. Burch LLC, the runner-up bidder to develop the building. (Burch is challenging the city’s selection of Gatehouse, saying that Gatehouse should be disqualified for not specifying how it plans to comply with the city’s disadvantaged-business-enterprise program.)

The tax-credit regulations require Gatehouse to retain the apartments for five years after they are constructed. The developers have said they would need two years to renovate the whole building, in which case sale of the units could begin in 2021.

The 318-page Gatehouse proposal carries only parenthetical mention of a possible condo conversion:

(Note: all 280 rental units can potentially be converted to W-branded for-sale condominium residences with hotel services and amenities in the future, but will initially be unbranded, separate residences with discrete, dedicated residential-only services and amenities).

A condo conversion could be quite profitable.

Condos at One River Place, just upriver from the World Trade Center, have sold recently for $360 to $600 per square foot, said Richard Stone, a senior sales and leasing associate at Latter & Blum real estate company.

No one knows, of course, how much World Trade Center condos might fetch in 2021, but according to Latter & Blum, prices for Warehouse District/Central Business District condos have doubled since 1998.

Altogether, Gatehouse’s 280 condos would total 270,000 square feet. At, say, $500 per square foot, the condos could sell for $135 million. Costs associated with the condo conversion and marketing are projected at between 15 and 20 percent of what they sell for.

That would be a nice return on the investment, even without factoring in revenue to Gatehouse from the hotel. The developers say they will put up $10 million in equity and borrow $105 million toward the $190 million cost of the project, with the remainder provided by the $75 million in state and federal tax credits.

Several real estate experts contacted by The Lens said it would be highly unusual for a developer to give the city a cut of the condo sales.

“I’ve never heard of it being done,” said Wade Ragas, who formerly ran the real estate department at the University of New Orleans and now has a private consulting firm that evaluates property.

Ragas noted that once the building reopens, the city and other public agencies will collect taxes on the hotel’s food, beverages and rooms, as well as a higher property tax due to an increased appraisal for the renovated building.

An analysis commissioned by Gatehouse says the city and other public agencies would collect $41.5 million in sales, property and hotel occupancy taxes during construction and the first 10 years of operation.

Gatehouse says the city also would collect $12 million in increased revenue from vehicles parked at the city-owned World Trade Center garage, which abuts the nearby Hilton Hotel. (That lease is up in 2019; under the lease, Hilton receives a management fee for running the garage.)

Gatehouse has struck a long-term agreement with Starwood, owner of the W hotel chain, but details have not been fully disclosed. Under standard deals of this kind, the hotel chain — W — would manage the hotel for Gatehouse, remitting profit to Gatehouse over and above its share of the income and costs. Gatehouse projects an average daily room rate of $245 in 2018 with a 74 percent occupancy rate. In at least the first five years, Gatehouse would also make money by renting the apartments, at a projected $2 per square foot.

Ivan Miestchovich Jr. is the director of the Institute for Economic Development and Real Estate Research at the University of New Orleans. He believes that in lieu of participating in condo sales, the city should receive annual lease payments from Gatehouse based on the total appraised value of the underlying land – an appraisal that should be updated every five to 10 years under the lease.*

“It’s in the best interests of the city to make a deal as clean and clear-cut as possible,” Miestchovich said. “The building has lain fallow for a long time. It’s time to put that baby to work. Let the developer do what he does best.”

That is certainly Gatehouse’s view. Gatehouse officials oppose giving the city a cut of the condo sales, saying it would be too complicated to structure and would be unfair to Gatehouse since it is assuming substantial risk.

“In short, we are willing to pay more than fair market value for the as-is WTC property, but not so much more that it kills the larger $190 million redevelopment, as well as the much larger new city benefits, jobs, and revenues that go with it,” David A. Garcia, identified by Gatehouse as the local developer, wrote in an email. Garcia was part of the team that redeveloped the former Krauss Department store on Canal Street into a mixture of shops and apartments, and his company won the right to redevelop the shuttered Six Flags park in New Orleans East.

Marty Collins is Gatehouse’s president and chief executive officer. He has developed more than $1 billion of hotels in California, Texas and Florida, according to his group’s proposal.

Cedric Grant, a deputy mayor, is the city’s point person in the negotiations. In an interview, he said city officials can’t do much until they obtain an independent appraisal of the World Trade Center building. The city has hired Truax Robles & Baldwin, a Metairie-based firm, to do that. Grant said he hoped to have the appraisal by the end of October and said he expected negotiations with Gatehouse to last from three to six months.

“The city for once has a real valuable piece of property,” Grant said. “We’re in a position where we ought to be an equal partner in this thing. They ought to meet our civic goals. We should also make a return on investment.”

Grant said city officials haven’t decided what type of payment from Gatehouse might be best, but in his view the city is sitting “in the catbird seat.”

To assist, the city has hired several outside consultants: Scott Whittaker, an attorney for Stone Pigman; Michael Siegel, the president of Corporate Realty; and Rick Swig, a hotel consultant based in San Francisco.

The New Orleans Building Corp., a city agency, owns the World Trade Center building. Its seven members will have to approve the deal negotiated by Grant. Its members are:

  • Mayor Mitch Landrieu

  • City Council President Jackie Clarkson

  • Councilwoman Stacy Head

  • Councilwoman Kristin Gisleson Palmer

  • Kathleen Turner, who manages the Pontchartrain Center in Kenner

  • William Detweiler, a consultant for military and veterans affairs at the National WWII Museum

  • Collette Creppell, director of campus planning at Tulane University

The City Council also will have to vote on the deal, said Tyler Gamble, Landrieu’s press secretary.

Clarkson, who was a real estate agent, said getting an upfront payment from Gatehouse would be best. That money, she said, could be used to improve public spaces that could lead to more development.

Clarkson said, however, that she doesn’t feel compelled to reach a deal with Gatehouse at all costs.

“If we can’t negotiate a good deal for the city, we can go out for an RFP [request for proposals] again,” she said.

*Correction: This story misstated Ivan Miestchovich Jr.’s suggestion for determining the annual lease payments to the city. He said that they should be based on the value of the underlying land, not the building. Also, the photo caption for this story incorrectly stated that Gatehouse still proposes a giant ferris wheel on the river. Though that was part of the original plan, it has faced public opposition and appears unlikely. (Oct. 15, 2013)

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  • NOLA_Darling

    Tyler, please take a real estate development course, because you consistently mislead readers with your analysis of deal financing programs (or maybe that’s your intention since The Lens staff hasn’t used this language when writing about the South Market or the dozen or so CBD projects that are benefiting from tax credit programs).
    To say that “state and federal taxpayers would be on the hook for $75 million of the $190 million” when describing the HTCs is erroneous. If that’s your reasoning, then the state has been “on the hook” for the billions in digital media and film tax credits that it has issued to promote those industries. The way the HTC program works is that 1) a project applies for a certain amount of tax credits; 2) those tax credits are “sold” to an investor; 3) the proceeds are used to help finance the project; and 4) the investor applies the tax credits towards its state or federal tax liability. That said, tax credits are not a direct subsidy to a project, but an indirect incentive for project investors.

  • Tyler Bridges

    NOLA_Darling – I do know how the historic tax credits work. The bottom line is that state and federal taxpayers will be out $75M or so, whether the tax credits are deducted directly from the treasury or sold to an investor. They are a subsidy, just as the film tax credits are a public subsidy. Please allow me to correct a misstatement of yours. You wrote that The Lens has not described South Market as benefiting from tax credit programs. We have on at least one occasion (and perhaps others). I did describe South Market as receiving millions of dollars of government subsidies in a July 28 article about Mayor Landrieu and his siblings owning a parking lot adjacent to South Market.